Business Matters: New Report Predicts Digital-Vs.-Physical Tipping Point That Already Happened

Being a day behind the news was acceptable before the rise of the Internet and the 24-hour news cycle. But there's really no excuse for being a year behind major forecasts and trends.

The press has been drawn to a new report by Strategy Analytics that forecasts U.S. digital recorded music revenue will exceed physical in 2012. Unfortunately, Strategy Analytics is predicting an outcome that has already arrived and has been well documented.

According to the IFPI, U.S. digital recorded music revenue exceeded physical revenue in 2011. The IFPI's Music Industry in Numbers 2012 puts the trade value of the U.S. digital recorded music market at $2.21 billion and the physical market at $1.84 billion. If we just take into account traditional purchases and set aside subscription revenue, digital still beats physical $1.95 billion to $1.84 billion.

Exhibit B is the RIAA's "2011 Year-End Shipments Statistics" report. This report, available at the RIAA's "Research" page since March, details an even 50/50 physical-digital split in retail value across all formats in 2011. Naturally it's no stretch to say the U.S. recorded music market will reach a tipping point in 2012 when it was balanced the year before and nearly on a precipice a year earlier (54 to 46). Again, the RIAA is historical data. The media covered this tipping point back in March when the RIAA made the announcement. Needless to say, forecasts should precede, not follow, historical data.

There are always differences in methodologies, of course. The RIAA included performance royalties (from digital services such as Pandora). Take out those performance royalties and physical would have slightly exceeded digital revenue. But in an age when consumers have access to both streaming services and purchases, why leave one out when calculating trends?

The same digital trend is also seen at Warner, whose Atlantic Records division started getting most of its revenue from digital back in 2008. In terms of recorded music, digital beat physical to the tune of $215 million to $188 million in Warner's fiscal quarter ended June 30, 2012. Physical and digital were effectively even in the first calendar year of 2012 -- $229 million for physical (and other) and $222 for digital.

Executives said in the company's last earnings call that digital gains were making up for physical losses. So as you can see, Warner's revenue is well on its way to tipping to digital in 2012.

Strategy Analytics' report has more forecasts, such as a global digital tipping point in 2015. And it has an incredibly rosy projection for a 9% decline in U.S. physical revenue in 2012. With year-to-date CD sales down 13.4%, according to Nielsen SoundScan, and both retail and wholesale prices getting seriously squeezed, a 9% physical revenue decline seems unlikely.